Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Is the Worst Over for Oil Stocks?

While some producers in Canada recently reversed years of spending cuts, others aren’t yet ready to boost spending.

The oil market downturn has had a dramatic impact on oil and gas producers across the globe. However, producers in Canada were among the hardest hit because the country's lack of pipeline capacity pushed the price of Western Canadian Select crude down below $20 a barrel earlier this year. That forced companies to hunker down and make dramatic spending cuts just to survive. For example, Penn West Petroleum(NYSE:PWE) cut investment spending by a stunning 90% to a mere $50 million.

However, with prices moving higher and starting to stabilize in recent months, some producers are beginning to boost spending after two years of devastating cuts in a sign that the worst is over. That said, others are not comfortable increasing spending just yet because they are not in the clear.

Coming back from the brink

Penn West Petroleum fought very hard to survive the downturn. It aggressively cut costs over the past two years, including laying off employees, suspending the dividend, and cutting capital cxpenditures to the absolute bare minimum level. Even with all those cuts it almost didn't make it through, which is why it needed to sell a boatload of assets to get its debt back under control. Those efforts paid off, with the company's financials now on solid ground. As a result, the company is in the position to generate excess cash flow even in the current environment.

The company plans to use some of that cash flow to boost investment spending. In fact, it recently raised its 2016 capex budget by 80% to $90 million. That incremental capital will add 3,000 barrels of oil equivalent per day (BOE/d) to its production by year-end and set it up for more growth in 2017. As things stand right now, the company plans to increase its budget to $150 million next year, which puts it in the position to deliver at least 10% production growth.

Back on track and ready for 2017

Enerplus(NYSE:ERF), likewise, spent the bulk of the downturn cutting costs to bolster its balance sheet with it cutting spending by 60% this year to just $200 million. In addition to that, it sold several assets and issued equity, which combined to reduce its net debt by 45% since the end of 2015. As a result, its balance sheet is back on solid ground and with commodity prices improving Enerplus is ready to return to growth mode.

The company took its first step forward last month when it added $15 million to its capex budget. That incremental capital will enable the company to complete three more wells this year to add about 1,000 BOE/d of production. Also, the company plans to use a portion of that capital to pre-order some equipment for its 2017 drilling program. These moves put the company in a much stronger position to grow production in 2017.

Not quite there yet

While Penn West Petroleum and Enerplus are looking forward to growing once again in 2017, not all of their peers are in a position to boost spending just yet. That is primarily because these companies still have some issues to work out. For example, Pengrowth Energy(NYSE:PGH) is focused on capital preservation right now because it has more than $500 million in debt maturing in 2017. That is why Pengrowth Energy cut its capex budget to just $65 million this year, which was well below the $183.8 million it spent last year and a fraction of the $904 million it spent in 2014. However, that spending cut should allow the company to build up about $200 million in cash by the end of this year, which it intends to use to pay down some of its maturing debt.

Meanwhile, Baytex Energy(NYSE:BTE) recently made another cut to its 2016 capex budget. The company initially planned to spend between $325 million and $400 million this year, which at the mid-point would have been a 53% reduction from the $521 million it spent last year. However, in early March it cut spending by another 33% to a range of $225 million to $265 million and then cut spending again in July to $200 million to $225 million. Baytex Energy did so not only because crude prices remain depressed, but it wanted to generate excess cash flow to trim debt. While Baytex Energy does not have the near-term debt maturity concerns of Pengrowth Energy, it still has more than $1.9 billion of long-term debt outstanding, which is a lot for the current commodity price environment.

Investor takeaway

While some Canadian oil companies are returning to growth mode after two years of spending cuts, others remain cautious. That caution mainly stems from their weaker balance sheets that need to improve before they are comfortable spending more money. That shows the worst is not yet over for some companiesbecause they still need to focus on survival given that oil remains volatile and might not be done going down.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries: Follow @matthewdilallo